Starting up while employed: Admit it

This is Part 2 of a 5-part series: Joy of Honesty in Business. It’s always been popular to work on new projects while still employed, but the current global recession makes this idea even more attractive.  There’s plenty of good advice out there about how to do this, but the lists I’ve seen have left out something critical: Tell your employer what you’re doing. You might think security by obscurity is wise, but in my experience being proactively honest is not only easier, it even opens doors. My first extra-curricular project was FastScheduler, a website for students to schedule classes at the University of Texas. Students would input their needed classes with day/time preferences (important for students who work). FastScheduler would provide a workable schedule based on available class openings. The best part was that FastScheduler knew which classes were already full and which were available, so the schedules were not only tuned to your preferences but also were possible to get. This was a vast improvement over the maddening telephone-based encumbent system. FastScheduler was popular — at its acme over 15,000 students per semester used the tool to schedule their classes. But none of this would have been possible if it weren’t for my employer, Paul Schmidt, the founder of Photodex. Paul liked the idea and volunteered Photodex’s servers. Without being honest with Paul, FastScheduler would never have made it past my own computer. This was 1996 when Internet servers and bandwidth were expensive; I could never have afforded to host this project myself. (Now if only Paul had noticed that I misspelled “Wendsday.”) A friend of mine has had even more impressive results with an interesting company called OtherInbox. Josh Baer had already become independently wealthy after selling his company SKYLIST (like Constant Contact before Constant Contact) to Datran Media. After two years as their Chief Technology Officer, Josh decided to pursue a new idea — a system that automatically organizes your e-commerce and newsletter email and scuttles it out of the way — in an “other inbox” — leaving your regular inbox clear for important, timely mail. Josh could have gone off on his own, possibly in secret. Instead, he approached Datran with a plan: Datran incubates OtherInbox in exchange for stock and for Josh remaining phyiscally in Datran’s offices so they can bother him on occasion even after his official employment contract is over. And it worked — OtherInbox is a hit and the next round of funding is underway. Employers won’t always be this solicitous, but honesty is still the best policy. Take my current company Smart Bear. My first product was a piece of shareware called Code Historian — nothing more than a curious side-project, certainly not a money-maker. I conceived of Code Historian just as I was starting work at DataCert. I could have kept Smart Bear a secret, tap-dancing around employment agreement statements like “Employee will expend all efforts in the interest of DataCert and in DataCert’s currently conceived products, designs, marketing efforts, customers, know-how, concepts, improvements, trade secrets, and business plans, as well as any contemplated future products, designs, marketing efforts, customers, know-how, concepts, improvements, trade secrets, and business plans.” (Whatever that means.) Instead, in a single stroke I removed all worry and interpretation: I simply added an addendum to my employment contract explaining what I was doing with Code Historian, making it clear that it was non-competitive and done on personal time, and including a sentence stating that this was not contrary to any provision in the employment agreement. Then I got DataCert’s lawyer (not some Director of Whatever) to sign the addendum. I still have the original. In this case the employer didn’t help me — and usually they won’t — but I can sleep easy knowing that I wasn’t doing anything wrong, and they agreed. In fact, many other articles on this topic describe how to skirt employment contracts and how to “break the news” as you quit so as not to stir up trouble. But if you’re candid and get it in writing, all that goes away. Sure it’s possible they say “no,” but in this case it was a bad idea to overlap anyway. I’ve seen friends be sued over such things. Getting sued can ruin your life even if you’re right, even if you’re exonerated. During the lawsuit you’ll be crippled with legal fees and worry. If you lose, you could lose all your savings and plenty of future earnings. Even if you win you don’t get your legal fees back! And you don’t get the time back either. Doing a startup is enough work and stress without also worrying about being sued by your ex-employer. Better to know up front and avoid that mess. “Not getting sued” trumps “fun new startup.” So do yourself a favor: Just be honest.

17 responses to “Starting up while employed: Admit it”

  1. And what about situations when you work for a company that will claim any "inventions" that you make during the course of employment that you do not declare as already invented at the start of your employment?

    I think that this "honesty with your employer" is a good idea, and can lead to great things as your examples have shown, but at the same time, you have to be VERY careful that you are not crossing a line or that your employer will not be as nice and generous as the ones in these examples.

    Perhaps it’s pessimism, but the success stories in this article sound as if a whole lot of luck was on the inventor’s side in each – perhaps an unexplored corrorelary is that none of these employers (sound like they) were large corporations?

  2. You’re right about the "inventions" clauses. That’s exactly why you must tell your employer what you’re doing and get it in writing that it’s not owned by the company nor is it in violation of anything else in the employment agreement.

    It’s true your employer might not be generous — that’s why you have to get specific and get it in writing.

    It’s also true that many companies will not sign such a thing. That’s fine. That means you should not try to start up on the side because they will find out later and then you’re at their mercy.

    "Luck" is not a factor in the stories above. If in one of these situations the parent company had said, "No, we won’t allow this," then there just wouldn’t be a startup. The "story" is then "Hey look, I didn’t get sued. That’s nice."

    Finally, you’re also mistaken that these were small companies. DataCert was large enough to have in-house, on-site council; Datran is even larger.

  3. What a joke. I’d be willing to bet a vast majority of businesses will can your arse if you aren’t in it totally for them. Your anecdotal evidence shows a complete lack in preperation for this "article". How about some statistical analysis instead of BS you come up with off the top of your head.

    Anyone that signs away their rights for a job is a moron. I’d rather work at Taco Bell than give away the ability to do whatever I want in my spare time. Oh, I’m sure your employer would love to know that you’re going into competition with them as well. I’m sure no one has left a company to then compete with them.

  4. Jason, you make good points (the Princess Bride character notwithstanding). Ideally, you do everything by the book and things go well. I think there are a couple of things that might put us in slightly different situations:

    1. The company I work at is a Fortune 100 company, and nothing to do with anything IT related. We can’t even negotiate a salary coming in, much less put in a clause. Some of the older people would even scoff if you bartended at night. But others are known to own investment property.

    2. The "startup" I’m doing has absolutely no connections with the core competencies of the company I work at.

    3. I put "startup" in quotes because, as you know, the profit I’m making is immaterial.

    However what you have inspired me to do is to check out my employment contract to make sure I am compliant to avoid any issues in the future.

  5. @Dale — Good idea. Keep in mind that the amount they can sue you for is not the amount of money you made, but rather the amount of damages you caused them.

    I agree that if your enterprise is non-competitive it’s less likely to cause a stir. However I’ve had two acquaitences be sued for non-competitive startups they did, and although both won in the end, it cost them a lot of time and money.

  6. I love that this debate has started. I agree in principle that honesty is the best policy – but I think it is often not on the table. i too work for a Fortune 500 company and there just is no way of getting a lawyer to agree to any language – not to mention the fact that you likely will be on the streets the next day.

    In these cases I say 1) Get a copy of the Conflict of Interest policies and then 2) Don’t break them! You’ll find there is enough wiggle room for you to start something on the side and not feel bad about it – but no need to "out" yourself and end your career.

    If you are ready to "out" yourself to a Fortune 500 company – then you have basically decided to take the plunge into full-time entrepreneurship – which is a big leap especially in this economy not to mention if you have kids.

    I say look out for #1 first – that’s all your employer will do anyway.

  7. Jason, you’re absolutely right! But interestingly, he-who-chases-the-six-fingered man is also right.

    Most bosses would probably flip if an employee came to them wanting to work on another business project "on the side." That’s because most bosses are terrible (see Scott Berkun’s latest post on the topic) and they will assume that anything you are doing which they didn’t assign represents insubordination. You "obviously" have too much time on your hands if you want to do a side project, which means you are overestimating work or slacking on the job. You "obviously" think your employer doesn’t know what they are doing with you since you have a better idea for how you can spend your time.

    Following Jason’s suggestion might work out as well as it did in the anecdotes, but you also might get a stern lecture or be fired. These are all good outcomes! In the first case, you get to work on your project. In the latter two, you learn immediately that your boss and/or your employer is unreasonable, which is motivation to start looking for a new job—or you that you should start up a company based on your idea!

  8. I suppose it depends on how much risk you’re willing to take.

    If your business is clearly non-competitive, if you don’t have high visibility within the company, and if you really aren’t using company resources (where you might be discovered), then perhaps you can slip off quietly into the night.

    If any of these conditions are not true, then the company might have an interest in suing you when they find out. That risk is not worth it.

  9. Thanks for the nice link (always good to know someone thinks a post of mine is "good advice.") I agree on your follow-up point — in many cases, it is a good idea to test out things to see where your full-time employer stands on side projects, and if you get a good feeling, to let them know about your side-gig. So kudos.

    Enjoy your blog and will keep reading your posts.


  10. That’s because most bosses are terrible (see Scott Berkun’s latest post on the topic) and they will assume that anything you are doing which they didn’t assign represents insubordination. You "obviously" have too much time on your hands if you want to do a side project, which means you are overestimating work or slacking on the job. You "obviously" think your employer doesn’t know what they are doing with you since you have a better idea for how you can spend your time.

  11. Great discussion! Other than Inigo Montoya, it was an intelligent discussion among different viewpoints. Kudos to the type of people you’re drawing with this blog.

    I love the fact that Dilbert is tackling this issue… great timing! Or does Scott Adams read this blog?

    I still haven’t figured out how to find my company policies yet, but I will keep trying…

  12. This is all interesting in the fact that I’m complete opposite – I’ve been freelancing and I just got the full time "job". And not only that they know about me freelancing (I first did a consulting gig for them) – but they are OK with me continuing to do so to the extent I will be "full time consultant" and paid to my business (self employed) account.

    It’s a bit of a funny situation since they recently closed up business here (Eastern Europe) and all employees are now employed and paid by the "mother" company from UK. And paying me to business account (I will be invoicing them each month) is actually less paperwork for both sides since they will not need confirmation that I paid taxes/insurance/fees. I also get to pay less tax/health/social that I can invest in additional social or similar…

    Naturally they were worried that this is just temporary and that I will wish to leave them soon. Explaining that (good) regular paycheck, learning new stuff and both while being with cool bunch (after 5 years of freelance – 2 years of full time) is why I’m doing it – ensured them that I will be there for a while.

    I explained that I still wish to run my own business at some point, it’s just that I need more knowledge and money :)

    So it all depends on the people/situation. But I do agree that it’s better to be honest up front (and get it in writing) – at least you’ll definitely know where you’re standing.

  13. @Alex: They are right to worry because you have options.

    On the other hand, the reasons you list for why you might stay are the same for any talented employee, regardless of whether they’re actually doing something on the side or not.

    Many people don’t realize this. You have to treat your employees properly all the time. Well, you don’t have to. Only if you want the good ones to stay.

  14. I wish I had had this advice in April of 2008 when I was trying to start my defense logistics solutions firm. I made a lot of the mistakes you listed. It took the firm 3.5 months to find out. (the day after my son’s 3rd Birthday, July 23). I made the mistake of sending a marketing email similarly worded for the firm I worked for and my startup. Yes, the emails found thier way to the inbox of the President of the firm. I know dumb move. It cost me a great paying job , my savings (as it went away over the months of unemployment looking for a job), the last 18 months from my family and nearly my life (I was advising the police in Helmand Province, Afghanistan when I was caught in a rough ambush) as the only job I could find in the midst of the financial crisis was overseas.

    Before I started 3GPower2 I had a discussion wih my boss about the business and we cleared the air. No problems as I am in a totally different market space from my employer. A hard lesson to learned.

    • Wow, a powerful story, thanks for sharing. It’s unfortunate that you had to learn this way, but thanks for passing it forward.

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